Processed goods: Expanding refinery capacity and downstream marketing operations

While the export of crude oil remains a central part of Kuwait’s economy, in the longer term, the government has targeted economic diversification. The most straightforward way to accomplish this is to use the country’s most lucrative natural asset to produce higher-value petrochemicals and refined products. To that end, the government is looking to expand its downstream operations both at home and in select foreign markets.

UPGRADES: Kuwait’s refining capacity stood at 930,000 barrels per day (bpd) in 2010, equivalent to about 1% of the world’s total, according to the “BP Statistical Review of World Energy”. At the head of refinery operations in the country is the Kuwait National Petroleum Corporation (KNPC). Started in 1960 as a joint venture between the government and private sector, KNPC currently operates three refineries: Mina Abdulla, Mina Al Ahmadi and Al Shuaiba.

Plans are currently under way for major upgrades to the Mina Abdulla and Mina Al Ahmadi refineries. This modernisation effort, known as the Clean Fuel Project (CFP), it set to add at least 30 units to the existing refineries while phasing out others. Following these changes, Mina Abdulla and Mina Al Ahmadi will be able to produce cleaner-burning fuels, including low-sulphur varieties (fuels whose sulphur content is equal to or less than 10 parts per million) and Euro IV fuel (a low-emissions diesel petrol that complies with European emissions control standards).

The aging Al Shuaiba refinery will also be de-commissioned. The Supreme Petroleum Council (SPC), Kuwait’s governing body for hydrocarbon-related affairs, has approved the first stage of the project, allocating KD245m ($883.2m) for the CFP’s front-end engineering and design phases.

NEW CAPACITY: In addition to upgrading its existing refineries, KNPC is also planning to build a new refinery at Al Zour. The facility is set to be the most expensive of the projects currently lined up and is likely to have a far-reaching impact. Upon completion, the oil processing complex is expected to increase the country’s total capacity by 56%, from 930,000 bpd to just over 1.5m bpd. The new refinery’s 615,000-bpd capacity will make it the largest in the Middle East. Initially scheduled for completion in December 2011, the project was delayed in 2009 when members of the National Assembly called for modifications to the proposed contract terms. As of mid-2011, however, the SPC had given the green light for construction work to start on the KD4bn ($14.4bn) plant, which is now due to become operational by 2016.

EASTERN PROMISES: Expanded and upgraded refinery capacity at home is not the only item on Kuwait’s downstream agenda, however. Refinery projects in foreign markets are seen both as a way to diversify the country’s energy portfolio and to expand the demand for its crude oil. A key player in these efforts is Kuwait Petroleum International (KPI), the international subsidiary of the Kuwait Petroleum Corporation (KPC).

Established in 1983, KPI markets fuels, lubricants and other petroleum products abroad.

KPI is currently in the midst of securing and executing a number of downstream projects in Asia. Perhaps the most significant of these is a $9bn refinery in China’s southern Guangdong Province, which the government approved in March 2011. A joint venture between KPI and China Petroleum and Chemical Corporation, the facility is set to include a 300,000-bpd refinery as well as an ethylene cracker that will have an annual production capacity of 1m tonnes. Although the planned commission date for the facility is in 2014, analysts expect that the project will likely come on-line closer to 2018, according to the US Energy Information Administration.

The new refinery will process Kuwaiti oil supplied by KPC. This would likely mean a boost to the country’s oil exports to China, which stood at 200,000 bpd in 2010.

At the same time, the deal will benefit China as well. As the world’s second-largest consumer of oil, long-term contracts help to ensure its energy security.

Another project on KPI’s agenda is the Nghi Son refinery in Vietnam’s Thanh Hoa Province, located in the north of the country, roughly 200 km south of the capital, Hanoi. The $7.5bn project is expected to have a capacity of around 200,000 bpd.

STAKEHOLDERS: Petrovietnam, the Vietnamese government’s oil and gas company, holds a 25.1% stake in the project, followed by Japanese refiner Idemitsu Kosan and KPI, each of which own a 35.1% stake, and MitsuiChemicals, with a 4.7% share. According to Petrovietnam officials, this sort of funding arrangement is a new development. The Nghi Son complex, they say, will be the country’s first refinery funded by foreign investors. As is the case with the Guangdong project, the refinery will process Kuwaiti crude oil, and KPI has signed a long-term oil supply contract with Petrovietnam.

The project, which has been in the works since 2008, is still in its planning stages and is progressing despite some delays, and in October 2011 Petrovietnam announced that construction of the refinery would begin in the last quarter of 2011. The facility will be built by a consortium that includes French oil services firm Technip, Japanese engineering firm JGC Corp and Tecnicas Reunidas, a Spain-based oil engineering firm.

Finally, Indonesian state oil and gas company Pertamina is considering a deal with Kuwait to build an $8bn-$9bn refinery on the island of Java that would have acapacity of 300,000 bpd. KPI is conducting a feasibility study to evaluate the project’s prospects. If it moves forward, KPI will most likely seek a strategic international partner to form a similar shareholding agreement to the Vietnam project. As with the other Asian refineries, KPC would supply crude oil to the facility.

EUROPEAN MARKET: The sales and marketing of Kuwait’s refined products, whether produced at home or abroad, are vital to the country’s downstream industry. In Europe and Asia, KPI refines and markets fuel under the trademark Q8. During 2010 and 2011, the company was active in expanding its European operations.

In January 2011 KPI announced the commissioning of three new projects at its Europoort refinery in the Netherlands, with the aim of reducing the facility’s environment impact. The three facilities – which have a combined investment value of $100m – consist of a waste gas treatment plant for sulphur dioxide and mono-nitrogen oxide outputs, an additional sulphur recovery unit and a high-efficiency boiler unit. Another project that was in line with the company’s focus on emissions reduction was the October 2010 introduction of a new ED95 fuel blend, a mix of 95% ethanol and 5% ignition agent, by OKQ8, a joint venture between the Swedish OK Ekonomisk Förening (OK Economic Association) and KPI. This cleaner-burning fuel has been designed for use in high-payload commercial vehicles.

Kuwait’s investments in refining capacity and other petroleum projects demonstrate a broad strategy to increase the country’s role in the market for downstream products worldwide. Securing long-term projects in high-growth markets such as Vietnam and China while maintaining a presence in established markets like Europe should serve the country well as it determines the best way in which to gain the most value from its petroleum supplies and experience in the industry.

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The Report: Kuwait 2012

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